Tom Hanks and Meg Ryan Present Lesson in Retailng

Remember when the Tom Hanks character — owner of a Really Big Bookstore — drove the Meg Ryan character — owner of a charming little neighborhood bookstore — out of business in the movie, "You´ve Got Mail"? Two researchers at Wipro Technologies use the plot of the movie to make a point in their white paper, "Business Intelligence and Retailing."

"As quite sensitively portrayed in the movie," write authors Srinivasa Rao and Saurabh Swarup, "large chain superstores have nearly forced small independent retailers to close down. At the same time, these large retailers have gained considerable power in the supply chain. They are increasingly dictating terms to the retailers and inventing new ways of attracting customers."

Few independent retailers would disagree. The question, then, is what to do about it.

First, they suggest, segment your customers. Classify them like this: customers who respond to new promotions; customers who respond to new product launches; customers who respond to discounts; and customers who tend to buy specific products.

Next, analyze the effectiveness of any campaign or promotion you undertake. Take a look, Rao and Swarup say, at what works and what doesn´t. Do certain geographic areas respond better than others? Which customer segments, from those listed in the above paragraph, respond at all?

Third, they suggest, take a look at the lifetime value of your customers. The idea here is to establish long-term relationships with customers who probably will remain customers for a very long time. There are technological tools available to help you figure this out.

And, in fact, this is a good time to point out that Rao and Swarup are advocates of what they call business intelligence tools — data warehousing, data mining and online analytical processing or OLAP — to help retailers compete. Data warehousing is a popular term that means data that is structured for the purpose of being analyzed. Data mining, another trendy techno term, means searching for patterns in your data. OLAP is a software tool that permits analysis of data stored in a database.

OK, enough with the definitions. Back to the ideas.

The next area where business intelligence tools might help, is customer loyalty analysis. This gets back to the old truism that it costs less to keep an existing customer than to acquire a new one. Analyzing customer loyalty, the authors say, is best done with business intelligence tools.

"To develop effective customer retention programs," say Rao and Swarup, "it is vital to analyze the reasons for customer attrition. Business intelligence helps in understanding customer attrition with respect to various factors influencing a customer, and at times one can drill down to individual transactions, which might have resulted in the change of loyalty."

The last three categories where analytical CRM may be helpful are cross selling, product pricing and target marketing.

Cross-selling is a technique that enables retailers to use customer information to sell other products to customers at the time a purchase is made. Another variation of cross-selling is when you sell a more profitable product to the customer at the time of a sale.

Product pricing, say Rao and Swarup, "is one of the most crucial marketing decisions taken by retailers. Often, an increase in price of a product can result in lower sales and customer adoption of replacement products." Using business intelligence tools such as data warehousing and data mining, "retailers can develop sophisticated price models for different products."

Finally, on the subject of CRM, Rao and Swarup say that retailers can use target marketing to optimize overall marketing and promotion efforts by targeting campaigns to specific customers or groups of customers. "Target marketing can be based on a very simple analysis of the buying habits of the customer or the customer group, but, increasingly, data mining tools are being used to define specific customer segments that are likely to respond to particular types of campaigns."

Tomorrow in Retail Strategies, we´ll find out what Rao and Swarup say about managing the supply chain.

Srinivasa Rao is a technical manager with Wipro; Saurabh Swarup is a consultant to Wipro. Both work in the Business Intelligence and Data Warehousing Group.

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